Tag: Finance

Slow and steady wins the race

Posted on by Karac Avalron

So another finance piece today. Remember these are my opinions based on my experience of 30 years in the finance industry. Prior to making any financial decisions, you should seek out as much information and advice as you can to make sure you make the best decision for you.

So we are in an extended period of inflation and international worry, which affects financial markets. Inflation has leveled off, but we have two very unique situations that have occurred in the last few years making this inflationary period extend longer than most anticipated. First the pandemic. Without getting into that whole debate, economically, when you prevent people from working and companies from manufacturing and print money to sustain them inflation happens. Basically, there are less goods in the economy, making those goods more valuable. The second thing is we have had the great resignation.

Yes it’s rooted in the pandemic shut downs but the underlying economic realities of gig work also contributed. Coupled with the Baby Boomers (by population our largest generation) aging out of the work place and you have the conditions by which companies have to pay people more to produce goods and services, so they charge more for said goods and services. That is the inflation bit, the international worry? The Ukraine war.

Whenever a super power goes to war, (I define super power as any nation with nukes) everyone else gets on the edge of their seat. Russia has struggled in Ukraine, they are going to be there awhile and I do not seeing that war resolving soon. Therefore, this means you have a volatile period of ups and downs in markets. It’s hard to predict when things will stabilize my best guess is probably after the 2024 U.S. election, but that’s a guess.

Those who beat the drums of war, rarely fight in them.

So what do you do as an investor? You continue to be disciplined and invest slowly and steadily. You don’t sell in a volatile period unless you need liquidity fast. You ride the ups and downs, your buy opportunities now will likely evolve into gains later and sell opportunities are usually few and far between. It’s not a horrible idea to put some assets in fixed securities either, CD’s and treasuries are always nice to have but I would never go more than 10% of my portfolio. Still some CD’s are at 5%, which isn’t horrible when compared to historic inflation numbers.

Markets always go up and down, we will continue to see 300+ point swings some days for some time now as the U.S. Fed reserve keeps manipulating the interest rates (they were held artificially low for over a decade). The fed rate now is 4.75%. Anything over 5%, I think is a pretty big stretch but who knows at this point. Keep investing consistently and if you have a 5-10 year window you should be fine and actually come out ahead. Make sure you keep an eye on auto loans, it is the next “big bubble” and I think that one is coming to us later this year but we will see.

Overall, the best strategy to wealth is to retain as much of your income as possible and not send it to other people so you can live. Then taking that income and investing it with a long-term goal of growth. It takes time and perseverance particularly when things are rocky like they are now.

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One simple way to determine if you are healthy financially

Posted on by Karac Avalron

Not a long post today. Remember the finance posts you see on my blog are opinion pieces and not meant as financial advice. When making financial decisions you should seek out several resources and do your diligence and research. Now that out of the way there is one simple way to determine if you are healthy financially.

Do you pay the full balance of your credit card every month?

If you pay your credit card balance every month and never carry a balance this means you have enough income to cover all of your expenses. Now this has to be consistent, you cannot do it one month and then the other 11 not do it, but if you are paying off your CC balance every month this is a clear indication that you are healthy financially.

You see millions, tens of millions of people actually cannot pay their CC balances off every month. This means they spend more than they make, and that is the simplest way to know you are unhealthy financially. Simply put, if you can pay everything month to month you have created a sustainable financial life. Now do not confuse this with being wealthy, that is completely different.

Cash is still king

It does mean that you are financially healthy, now can you be healthier? Sure. You see what happens ideally is after you pay everything off every month you have money left over to save. That is how you move into wealth building and that is another post altogether. Remember this is simple, do not over think it. If you pay off all your CC balances monthly it is highly likely you are healthy financially.

You are living within your means. Now if you are skipping car payments and mortgage payments to make these CC payments that’s a problem but generally people skimp on the CC payments because there is a minimum payment which enables them to retain the balance to apply to other non-minimum payment bills, like mortgages.

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Finance Tip: How do you tip?

Posted on by Karac Avalron

So leaving a tip is actually a big deal in U.S. culture. It is pretty much everywhere you go now, if not on the screen you pay at then there is a jar on the counter. Tipping isn’t a bad thing, many people make ends meet by living off tips. My son delivers pizza as he gets through college, he comes home with 50-150 cash depending on the days he works just in tips. Now that nearly every transaction can be done digitally? You are prompted to tip more.

Quick example: My son who delivers pizza when the order comes in it can come in via phone or online. The customer can leave a tip prior to delivery. Often he’s getting 20% tip on the order before the food has been prepared, or he has delivered it because they ordered it online. Again tipping isn’t a bad thing but 20% up front? This is more and more prevalent and if you are interested in your personal finance +20% cost on your dinning purchases can add up fast. So how do you determine what to tip and when to tip? I have a pretty basic rule of thumb, if someone delivers something to me at home or to a table I am sitting at I will leave a tip. If I have to go obtain the item myself I do not leave a tip. I am not cheap I normally tip 15-25% it really depends on the level of service and the attitude of the person I am tipping.

Will they be asking for Bitcoin tips in 2050?

Really be mindful here because excessive tipping can add up quickly. Are you always dropping your change in the tip cup at Starbucks? Are you prepaying your tip before you receive service? Are you letting the Ipay pay screen steer you towards a higher than average tip? It’s important to reward great service that’s what a tip is for. Sadly, the hospitality industry has chosen to take advantage of the generosity of people who tip and pay staff less.

The theory is staff will “make it up” via tips. I think it should be opposite, I think you should get a tip if you perform a great service and it’s like a small bonus for your hard work. Culturally I don’t see this changing anytime soon in the U.S. but what can change is your personal approach. Remember it’s your money, tipping isn’t mandatory (in most cases) and tipping before you’ve been served isn’t wise, the person might not deserve it.

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How to weather the financial rollercoaster?

Posted on by Karac Avalron

So its 2023 and the rollercoaster we have been on financially in 2022 looks like it’s not going to let up in 2023. High inflation, low job force participation, governments manipulating interest rates, high demand from consumers and then the X factors, war’s pandemics etc. This is a unique point in time for global economics, any finance professional telling you what is going to happen is honestly full of @#$%. No one really knows, things are very unpredictable and on top of all that in the U.S. 2023 will start the 2024 presidential election process in earnest which will destabilize economic outcomes more.

So how do you “weather” this and get by? To be honest there is really only 2 things you can do directly to ensure you get through this. The first is increase your income, the second is decrease your spending. Now ideally you do both at the same time but one or the other should produce the outcome of you have more disposable income. Simply put, you should have more cash to spend or save and that’s what we want. Now increasing income can be a new job, a side hustle etc. Cutting expenses? Only you know what you can cut.

Money can’t buy you happiness, but it can buy you peace of mind

The point here is you need to increase your surplus cash anyway you can and bank it. Like I have said in other finance pieces basically increasing your “rainy day” fund. You see the finance industry will throw a lot of terms at you, nuanced financial strategic plans, and language that requires a financial planner to unwind. It’s how they make money, keeping you confused and frightened. Personal finance is a lot like losing weight, there is only really one way to lose weight, you eat less calories then you burn every day.

Don’t over complicate your personal finance. Spend less then you make. It’s a simple concept that requires discipline and planning to pull off. No one is going to do this for you, you have to do it. If you do you will create excess of cash that can be used to “weather” the financial storm or better, enable you to make purchases now that you otherwise weren’t able to because you did not have the discipline to create this excess.

Personal finance is a long term play. Be consistent, have a plan, get disciplined. You can do it, and if you achieve even modest results it can be very liberating.

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Finance: Interest Rates

Posted on by Karac Avalron

So from time to time on this blog I do finance pieces. I have been in the finance industry now over 30 years (yikes I am old). This is not financial advice only my financial opinion. You should consider multiple sources when making any financial decision and become as educated as you can. So the subject today is interest rates and how in the U.S. the federal reserve manipulates them to create false narratives in the economy.

Let me be clear here there are several factors in the U.S. economy that contribute to its overall health and well-being. The availability of credit though is a major factor and manipulating interest rates has a dramatic impact on financial outcomes. IMHO one of the biggest travesties in the U.S. economic model is the propensity to promote debt as a means to obtain assets. Of course there are times when you need credit for large purchases you don’t have the capital on hand to cover. Houses, vehicles, machinery that’s traditionally what credit was meant for. Now? You buy your lunch on credit.

The issue then becomes “how much is this purchase costing me?” you see it’s not the 8.99 for the sandwich and soda it’s the interest charge you incur on the purchase when (or if) you don’t pay off your credit card every month. Which, most Americans don’t do. The federal reserve’s rampant meddling with the federal reserve rate (the rate in which banks lend to other banks) has created horrible economic outcomes in the past.

The Fed’s need to relax on rate hikes for at least a quarter.

There is a good article here https://www.forbes.com/advisor/investing/fed-funds-rate-history/ from Forbes that discusses the changes. Essentially what happens is the higher the interest rate the more valuable currency becomes. This is actually a viable method to combat inflation. Inflation often occurs when too much money is in the system or to little supply of products. Post pandemic we have both of these issues which is why the Fed is raising interest rates so much so fast.

Prior to the interest rate hikes over the last 2 years the fed rate was too low. You see the issue really is the U.S. federal government manipulates the value of their currency as a buttress against its monumental debt spending. Now all governments do this to a degree but the U.S. is on a whole other level. We had the prime rate in the U.S. at .5% for years and under 1.0% for a long time. Everyone knew that was way to low but the economy was humming along we had good times so no one complained much.

The problem with that approach is you put off the pain and here we are. Had the fed maintained a more pragmatic approach to interest rates, bringing them back to historic norms incrementally over the last 20 years we would have less inflation now. In the year 2000 the prime rate was 5.75% high by today’s standards but a reasonable rate in my estimation. Why? Because what it does is requires those who use credit to make purchases to think carefully as the interest expense on the debt is high. It’s a big commitment financially to borrow anything at 5% IMHO.

So how do we get out of this manipulation? You can do rate caps but that’s another artificial means to an end. You do what’s called settling the rate market. You get to a point say 4% and you do not raise or lower the rates for 2 full quarters to see how the economy adjusts. The problem now is you have the government changing rates every month. They are doing this to manipulate the economy due to severe inflation. I get why they are doing it but had they not kept interest rates artificially low for nearly a decade the huge increases now wouldn’t be necessary.

I know all of this is fairly dry and not something most of you will probably want to read through. Here is the net bottom line. Leave interest rates alone for 6 months, let things play out see how the economy does. You then adjust .25 -.50 % from there and then wait again. Market adjustments take more than a quarter to take hold and because interest rates were so artificially low for so long it’s going to take well into 23, if not 2024 to flush out the current inflationary situation we have.

Hang in there and remember, your personal economy is paramount. Have a 6-month emergency fund, secure your income sources by diligence at work, and keep an eye on your spending.

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Finance Tip: How to pick great company stocks

Posted on by Karac Avalron

First and foremost, let me say that I am not a financial advisor, any finance posts you see on this blog are my own opinion based on decades of being in the finance industry and living my life. Now disclaimer out of the way, there is a method by which you can pick single company stocks that normally beat the indexes. It is another one of those dirty little secrets that a finance professional won’t tell you, but with a little common sense you could figure out on your own.

To be clear, I am talking about stock in one company like Apple, not mutual funds. These come with a much higher risk as your money is tied to the performance of one company exclusively. This method is one that I have employed in the past when helping to set up an investment portfolio for someone in my family circle. It is by no means full proof or for that matter scientific (from a math perspective) at all. It relies on a very subjective business measurement, done by multiple firms.

So what is this method? It is tracking annual lists of “the best places to work”

I know that sounds half assed, simplistic and an uncouth way to make a stock pick. Here’s the thing though, if companies are listed as “best places to work” isn’t the logical conclusion that they must have happy workers? Happy workers usually mean better services and products and that usually means higher sales which equals revenue.

How much is this going to cost me ?

Don’t dismiss this simplistic formula out of hand. Here is a few of the companies that made it on to multiple best places to work for 2021:

  1. Microsoft
  2. Nvidia
  3. In & out burger
  4. Google
  5. Delta Airlines

These aren’t small companies, as a matter of fact most of the are publically traded and provide great dividends. Now this method of stock picking isn’t absolute, companies can fall off the list at any time but the metrics used to evaluate “best places to work” are usually worker centric. That’s the secret sauce here because as I stated, happy workers = good products & services = profits = return on investment.

There is no one catch all best places to work list you should use, there are hundreds of them (if not thousands). What you want to do here is aggregate several (5-10) lists. So if Nvidia appears on 7 out of 10 chances are that’s a great place to work and this investment strat should be employed.

This ties in well to another piece I did about Aristocrat stocks here, combined if you employ both for a mid to long term investment cycle (5-25 years) you should do very well. Remember investments into the stock market are not guaranteed and should be done only after doing research and obtaining a good comfort level.

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Finance Tip: “The Cash Flow Buffer”

Posted on by Karac Avalron

This particular tip is used in business often. It is exactly as it sounds a buffer. Keep in mind that opinions I express in my blog may or may not be good advice for you personally. You should investigate all financial advice thoroughly before pursuing any course of action. So a cash flow buffer is a concept that many people might confuse with an emergency fund in the context of personal finance.

With the job market shifting to a more hustle economy, you might not be earning a steady paycheck any more. You might be doing contract or consulting work and who knows you might kill it for 8 months, then the next 2 months your down 60% on your earnings. This isn’t as farfetched as you might think. This happens a lot now. What I am seeing in the news articles I read are people busting their tails for 6 months, doing uber eats, working a full time gig, then maybe one more side hustle and banking a large chunk of change. Only to then slow WAY down to recover for 3-4 months, rinse and repeat.

The job market in the U.S. has changed a lot in the 35 years since I started at burger king in the mid 80’s. So one of the approaches I take with family members I advise financially is treat the working part of your life as a business. We set up a balance sheet, expenses etc. We build an emergency fund of 6 months of expenses (if there isn’t a whole lot of debt) and then work on the Cash Flow Buffer. There it is again, lets define it. A Cash Flow Buffer is the number of days you could continue to pay your bills out of your regular bill paying account if income were to stop.

Inflation is falling, but its still very high

Again this isn’t an emergency fund! So you have 5K in your checking account, you lose all your jobs you have no money coming in. You spend 3500 a month for expenses this would mean you have a cash flow buffer of 45 days. So many would assume you would then begin to tap your emergency fund, and that would be correct. AT THE END OF THE 45 DAYS. You see the buffer is meant to create space for you so you can replace income.

That 5K will keep you afloat for 45 days that’s your real window until you have a real emergency on your hands. The buffer assumes you are not replacing your income. Businesses use this tool a lot, particularly seasonal businesses who do a large % of their sales at a specific point of the year. For you in the new gig economy this might be useful for you to gauge as you navigate the new normal for working.

So how you do it is, look at your monthly spend. Take out all the non-essentials and come up with a number. (rent, electricity, food, water). If you lost all your income today how long could you pay for things without tapping your emergency fund? You see the concepts here are more for discipline purposes. The last thing we want to do is hit the emergency fund because if we tap into that, we know that things are really bad, it’s for emergencies.

Think about your personal cash flow buffer. I keep about an extra month of bills in my checking account so my buffer is 30 days which is light. I am confident that I would be able to replace my income (or a good chunk of it) before 30 days. Ideally you have a 30-60-day buffer here that you would use BEFORE the emergency fund.

I know it’s confusing, but if you start treating your financial situation as your own personal business and economy you might find that these things make sense.

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stressed-out-woman

Quick Finance Piece: Is this a recession?

Posted on by Karac Avalron

Yes, it is.

So before I go too far let me do the normal disclaimer. I am a finance professional and any advice you see on my blog is my own opinion only and is not meant as investment advice. So that out of the way, yes we are in a recession. “But the media says we aren’t in a REAL recession”. I don’t trust the media, if you do I can’t really help you….

An economic recession has been defined for decades as two quarters of economic decline as measured by GDP. Now that’s not the technical definition but that is what has been used as the gauge for many years. The United States is in a recession. Now there are DEGREE’S of recession and that is where the nuance comes in.

This is not a hard recession by any means. We have great job numbers (which is an interesting situation in of itself), but we have horrible inflation, a slowing housing market etc. You see what you aren’t hearing much about is the horrific impact that Covid shut downs had on industries and supply and demand economics. You shut down global production for 6 months, you just don’t flip a switch and it comes back to normal.

The ride shouldn’t be to bumpy this time around

Throw in a war, a decrease in domestic Oil refining, divisive politics, on and on. The situation is dynamic and fluid there is no one catch all correction to fix this. You had decades of artificially low interest rates now creeping up again. A hard recession would see the market decreasing, layoff’s and a higher unemployment rate.

Companies are reporting good earnings that means DEMAND is still there and that bodes well for a quick recovery. They call that a V shaped recovery. I suspect we will see another decline in the 3rd qtr. and possibly into the 4th but the basis for good economic outcomes are there. First, the job market is healthy, you can work and make money. Second, demand for goods and services is still robust, so companies are still making profit (which fuels point 1).

I think 2023 will be a better year economically, unless again something extraordinary happens (a pandemic, another war. Be prudent here and tighten things up as best you can and save a bit more than usual but I don’t suspect things to get horrible soon, but things will still remain in the current state for the near term.

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Yet Another finance secret finance professional won’t tell you (but I will)

Posted on by Karac Avalron

So another finance piece, as I write this the U.S. is in an official recession. This piece isn’t about recessions, inflation or politics so you can exhale. We are going to reveal another secret though that finance professionals don’t like to admit. So a quick disclaimer, I am a finance professional. I have been working in the finance and accounting field for over 30 years. This blog is not a finance advice blog; this is my own opinion based on my experiences. Any advice you receive regarding finance should be researched thoroughly by you as an investor and verified through multiple sources.

Now that out of the way here is the opening salvo “When things are good, everyone is a genius.” The last decade up until the pandemic really the stock market overall was pretty good. You had good annualized returns and many people made a lot of money. So being a finance professional and advising people to go into the market wasn’t a genius play. Of course if you aren’t fluent in finance you might have perceived it as such. Interest rates were low for a long time so there really wasn’t anywhere else to go with investing except real estate.

But the secret? Everyone is a genius when things are good, what about when things are bad? What about when you are in a bear market (when indices drop 20% in a calendar year)? The secret is, the real finance geniuses were diversified PRIOR to the bear market. Any finance professional could have told you to put your money in an index fund prior to covid and you would have made fantastic gains. The real economic geniuses advised you to diversify with money spread to commodities, bonds/treasuries, real-estate and precious metals (this is a commodity, but not a traditional commodity).

As an example, what if in 2016 your finance professional advised you to have 15% of your portfolio in “Gas & Oil”? That would look pretty good now wouldn’t it? Same with bonds, treasuries, wheat, gold… you get the picture. The secret here Is diversity of investment result in a wider spread of assets which can absorb declines in any particular sector.

Like it or not, the world still runs on Oil based products.

Now that does mean you would have had less in technologies for the same period and not enjoyed that growth. I concede that, but the savvy investor doesn’t play the short term they play the long term and sustained diversified portfolios over the long haul 10-30 years normally perform as well as a strict stock portfolio. Don’t get me wrong here, I personally believe the majority assets you are investing in should be either growth stock mutual funds or blue chip mutual funds.

100% of a portfolio though?  No, you diversify specifically for bear markets and sharp down turns because they always happen. It’s not a matter of if, it’s a matter of when and how long will it last. For calendar year 22 as of 6.30.22 the markets are down 20.3% now this has come up in July, there is no denying that but you’re still down overall. On top of that we have large inflation numbers devaluing the purchase power of your dollar. So what 1.00 would buy last year now buys .92 that’s an 8% decrease (rough estimate). That isn’t equated well in your portfolios return.

Meaning you made 10% on the stock sale but the money you received purchases 8% less than it did meaning the value of that 10% return to you in real time is a net positive of 2%. Again, the secret here is diversity. Always have part of your portfolio assigned to cash, bonds/treasuries, commodities and that will provide you a decent buffer for the next bear market because this will happen again.

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Another finance secret finance professionals won’t tell you (but I will)

Posted on by Karac Avalron

One of the more successful finance posts I have on my blog is a finance secret I shared that industry professionals wont. You can find that post here.

Today I have another secret for you, it’s not a true secret as its not actually hidden but unless you are astute in finance you aren’t necessarily going to catch it. It has to do with mortgages, which in the U.S. right now is a hot finance topic. House prices in the U.S. have risen over the last 3 years anywhere from 8-25% depending on what market you are in.  House prices traditionally do not go down, they level off. If we look at a 100 years of house price data, we can only find 2 years where the median average price drops in comparison to the prior year. Again, this is largely aggregated meaning a market like Manhattan is an extreme, a rural town in Montana might be an extreme as well but on average that is where it stands.

So what is the secret? When you go for a mortgage your ability to borrow money is based on your GROSS income, not your net. It’s a trick banks use to be able to lend you more. So your ability to borrow is based on the amount you earned, not the amount you actually have to spend. The bank/lender does not account for health insurance cost, taxes, child support on and on. The good news is people who would otherwise not qualify for a mortgage can based on their gross income.

Borrowing the max amount, is a foolish move.

The bad news is exactly the same as the good, you can qualify for mortgages you would not have the ability to afford because it was based on your gross income, not your net. So you get situations where people borrow too much, you get terms like “house poor” because most of your income goes to paying your mortgage. The kicker? (well there is two) you pay for the privilege to borrow more than you can afford via interest. The other? You pay for PMI (Private Mortgage Insurance) which essentially protects the lender if you cannot pay the mortgage THEY gave you. You know the one they based on your gross not your net.

No lender is going to tell you it’s too much house, unless its WAY overpriced for your income. You have to be the one who figures this out. You need to estimate the mortgage payment and look at how much you actually TAKE HOME a month. You don’t want your mortgage payment to be more then 25-35% of your take home pay. Additionally, you don’t want a 30-year mortgage if you can absolutely avoid it because the interest alone is a killer. Banks want to lend you money, that’s how they make THEIR money via interest. It’s a tough real-estate market out there you have to be extra careful.

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